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CPA - AUD > CPA Excel > Flashcards

CPA Excel Flashcards

1
Q

What are the services for which a CPA firm is required to have a system of quality control?

A

Audits, attestation, compilation and review services (not applicable to tax or consulting services)

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2
Q

What is the auditor’s objective for audit planning as prescribed by the PCAOB’s Auditing Standard No. 9?

A

The objective is to plan the audit so that the audit is conducted effectively.

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3
Q

Give an example of a potential conflict of interest.

A

Providing tax or financial planning services for several members of a family who may have opposing interests.

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4
Q

How do the provisions of the AICPA Standard of Planning and Supervision apply to practitioners performing professional services?

A

The AICPA Standard of Planning and Supervision requires the practitioner to adequately plan and supervise the performance of professional services.

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5
Q

Define “variable fees.”

A

Fees that may vary depending on various factors, including the complexity of services rendered.

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6
Q

Under the AICPA’s Code of Professional Conduct, what actions should be taken by the member regarding commission or referral fees?

A

Accepting a permitted commission or referral fee must be disclosed to the client.

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7
Q

Define “material weakness” in internal control.

A

A deficiency, or combination of deficiencies, in internal control over financial reporting, that creates a reasonable possibility that a material misstatement of the financial statements sill not be prevented or detected on a timely basis.

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8
Q

What does the acronym DOL stand for?

A

Department of Labor

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9
Q

What preconditions must exist for an auditor to accept an engagement to report on an entity’s MD&A presentation?

A
  • Practitioner must have audited the annual financial statements for the latest period covered by the MD&A presentation.
  • Any other financial statements involved must have been audited, or at least reviewed if they are interim financial statements, by the practitioner or a predecessor auditor.
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10
Q

Define “batch total.”

A

The sum of a particular field in a collection of items used as a control total to ensure that all data has been entered into a system.

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11
Q

What government body oversees the PCAOB?

A

The Securities and Exchange Commission (SEC)

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12
Q

Is a public company required to rotate audit firms?

A

Sarbanes-Oxley does not require a public company to rotate audit firms.

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13
Q

List some controls that can be put in place / built into hardware and systems software.

A
  • Parity check
  • Echo check
  • Diagnostic routines
  • Boundary protection
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14
Q

What is meant by the term “related party”?

A

One party that controls or can significantly influence the management or operating policies of anther party

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15
Q

Describe the basic requirement associated with the PCAOB’s Auditing Standard No. 7, “Engagement Quality Review.”

A

PCAOB Auditing Standard No. 7 requires an engagement quality review and concurring approval before issuing the report for audit (or review) engagements conducted under PCAOB standards.

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16
Q

Define “deficiency in design.”

A

A deficiency that exists when a control necessary to meet the control objective is missing or when an existing control is not properly designed so that, even if the control operates as designed, the control objective is not always met

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17
Q

What are the objectives of transaction services?

A

To provide services related to a specific client transaction, generally with a third party

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18
Q

What is meant by the term “monitoring” (as is relates to internal controls)?

A

The policies and procedures involving the ongoing assessment of the effectiveness of internal control over time

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19
Q

List the circumstances that impact the extent of supervision as outlined in the PCAOB’s Auditing Standard No. 10.

A
  • The size and complexity of the company
  • Nature of the work assigned to engagement personnel
  • Capabilities of each engagement team member
  • The risks of material mistatement
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20
Q

List the types of activities to which independence rules do not apply under the principles of the Code of Professional Conduct.

A
  • Tax work

- Consulting

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21
Q

What is the auditor’s basic audit planning responsibility?

A

The auditor should plan the audit (and design the required written audit program or plan) to be responsive to the auditor’s assessment of the risk of material misstatement.

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22
Q

What is the role of the Professional Ethics Executive Committee (PEEC)?

A

The Professional Ethics Executive Committee monitors International Federation of Accountants’ activities and gives the U.S. input to International Ethics Standards Board for Accountants (IESBA).

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23
Q

List some internal control implications associated with an IT environment.

A
  • Segregation of duties may be undermined (a disadvantage)
  • Audit trail ma be lacking (a disadvantage)
  • Computer processing is uniform (an advantage)
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24
Q

What is meant by the term “preconditions for an audit”?

A

The use by management of an acceptable financial reporting framework in the preparation of the financial statements and the agreement of management to the premise on which an audit is conducted

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25
Q

What comparisons should be made within the entity to ensure the appropriateness of payroll transactions?

A
  1. Payroll information should be periodically matched to information in personnel files.
  2. Payroll checks should be compared to entries on the payroll register.
  3. Amounts on the payroll register should be agreed to the applicable general ledger accounts.
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26
Q

In applying SSCS, why must a member performing consulting services use professional judgement?

A

Professional Judgement must be used in applying SSCS in a specific instance since the oral or written understanding with the client may establish constraints within which services are to be provided. For example, the understanding with the client may limit the practitioner’s effort with regard to gathering relevant data. The practitioner is not required to decline or withdraw from a consulting engagement when the agreed-upon scope of services includes such limitations.

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27
Q

List the fundamental principles of the International Federation of Accountants (IFAC) code.

A
  • Integrity
  • Objectivity
  • Professional competence
  • Due care
  • Confidentiality
  • Professional behavior
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28
Q

List the five principles and categories of criteria associated with Trust Services of SysTrust and WebTrust.

A
  1. Security
  2. Availability
  3. Processing integrity
  4. Confidentiality
  5. Privacy
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29
Q

What is the purpose of the Sarbanes-Oxley Act of 2002?

A

The purpose is to address a series of perceived corporate misconduct and alleged audit failures Including Enron, Tyco, and WorldCom, among others) and to strengthen investor confidence in the integrity of the U.S. capital markets.

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30
Q

Define “application controls.”

A

Information processing controls that apply to the processing of specific computer applications (controls around input, processing, and output)

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31
Q

Define the term “significant risks.”

A

Risks that the auditor believes require special audit consideration

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32
Q

What periods should be covered in the management representations letters?

A

All periods included in the audit report

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33
Q

What is the effect of a limitation in the lawyer’s response to the letter of inquiry on the audit report?

A

This would be considered a scope limitation sufficient to prevent an unqualified opinion and likely resulting in a disclaimer of opinion.

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34
Q

What are risk assessment procedures?

A

Procedures performed to obtain an understanding of the entity and its environment, including internal control, to assess the risk of material misstatement, whether due to fraud or error.

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35
Q

What type of assurance is associated with a review of an entity’s financial statements?

A

Negative assurance, which is considered a moderate level of assurance

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36
Q

What actions should an auditor consider when an illegal act has been detected?

A
  1. Gather additional evidence to determine relevant facts.
  2. Discuss the matter with the appropriate level of management.
  3. Consider consulting with the entity’s attorney and/or relevant specialists.
  4. Consider the implications to other audit areas.
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37
Q

List the types of physical safeguards used to protect data files.

A
  1. File labels
  2. File protection rings
  3. File protection plans
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38
Q

Define “close relatives” (as defined for independence purposes).

A
  • Parent
  • Sibling
  • Non-dependent child
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39
Q

When engaged to audit financial statements that are prepared in accordance with a financial reporting framework generally accepted in another country for use solely outside the U.S., how is the Opinion paragraph of the auditor’s report affected?

A

The opinion would be changed as follows: “In our opinion, the financial statements referred to above present fairly, in all material respects, … in accordance with (specify the financial reporting framework generally accepted) in (name of country).”

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40
Q

What is meant by the term “component” in connection with group financial statements?

A

An entity for which group or component management prepares financial information that is required by the applicable financial reporting framework to be included in the group financial; statements

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41
Q

List the two parameters of a normal distribution.

A
  1. Mean

2. Variance

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42
Q

What is the accountant’s responsibility for establishing an understanding regarding review engagements?

A

The accountant should establish an understanding about the engagement’s objectives, management’s responsibilities, the accountant’s responsibilities, and the limitations of the engagement, among other matters with management and document that in writing with an engagement letter.

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43
Q

What is the purpose of the review of interim financial information?

A

To provide the CPA with a basis for communicating an awareness of any material modifications that should be made to conform with the applicable financial reporting framework, such as GAAP or other applicable financial reporting framework

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44
Q

Describe an example of a conflict of interest according to the AICPA’s Interpretation 102-2.

A

A CPA performing a professional service has a significant relationship with another person, entity, product, or service that could be viewed as impairing the CPA’s objectivity.

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45
Q

Who are considered to be in a position to influence (PTI) as outlined in the Principles of the Code of Professional Conduct?

A

Those who:

  • Evaluate the performance or recommend compensation of attest engagement partner (AEP)
  • Directly supervise the AEP and all successively senior levels
  • Consult with team during engagement
  • Provide quality control or other oversight
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46
Q

What is the difference between an overall audit strategy and an audit plan?

A

An audit strategy deals with higher level issues, such as allocating audit resources, whereas an audit plan is more detailed and deals more specifically with the nature, timing, and extent of audit procedures to be performed.

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47
Q

List some benefits of an audit to a private company (also known as a nonissuer).

A
  1. More favorable cost of capital
  2. Insights into adequacy of internal controls
  3. Benchmark an entity’s performance with other similar entities
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48
Q

What is the effect on a compilation report if the accountant is not independent?

A

A compilation does not require independence, since no assurance is provided, but the compilation report must point out that fact when independence is lacking. The auditor may choose to add a single sentence to the end of the compilation report without further explanation as to the reason(s) for the impairment of independence; or may instead choose to disclose the reason(s) for the impairment of independence.

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49
Q

Who can be members of IFAC?

A

Accounting organizations such as the AICPA can be members of IFAC, but individual accountants cannot be members.

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50
Q

What is the role of the International Federation of Accountant’ (IFAC’s) Public Interest Oversight Board (PIOB)?

A

The PIOB provides oversight to ensure that IFAC’s standards, including auditing standards and ethical standards, are responsive to the public interest and to enhance investor confidence in these standards.

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51
Q

What is meant by the term “applied criteria” in connection with summary financial statements?

A

The criteria applied by management in the preparation of the summary financial statements

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52
Q

What is meant by the term “positive confirmation”?

A

A response is requested whether or not the confirming party agrees with the entity’s recorded amount. A non-response indicates a “loose end” that must be resolved.

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53
Q

Give an example of an analytical procedure to evaluate wages and salaries payable at year-end.

A

The auditor might estimate the wages and salaries payable based on the number of days to be accrued relative to the payroll for a normal pay period.

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54
Q

What does the acronym AO stand for?

A

Auditing Organization

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55
Q

What is meant by the term “observable inputs”?

A

Assumptions that market participants would use in pricing an asset or liability based on market data from sources independent of the reporting entity

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56
Q

List the advantages of narratives (memos) to document the auditor’s understanding of internal controls.

A
  1. Tailored to the client
  2. Can be as detailed or as general as desired
  3. Easy to prepare
  4. Easy to read
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57
Q

What interim standards were adopted by the PCAOB?

A

PCAOB adopted the AICPA auditing standards in existence on April 16, 2003, as “interim standards, on an initial transitional basis.”

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58
Q

Define “sampling.”

A

Application of an audit procedure to less than 100% of the items within an account balance or class of transactions for the purpose of evaluating some characteristic of the balance or class

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59
Q

What type of professional requirement is indicated by the word “must” in AICPA professional standards?

A

Unconditional requirement

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60
Q

Independence is impaired if an audit firm employee is approached by a client regarding a job, unless what actions are taken?

A

Required actions by the audit firm employee:

  • Person promptly reports such offer; and
  • Removes self from engagement until offer is rejected.
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61
Q

What is meant by the term “transaction cycle”?

A

A group of essentially homogeneous transactions, that is. transactions of the same type

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62
Q

List some examples of specialists.

A

Actuaries, appraisers, engineers, geologists, etc.

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63
Q

Identify three ways auditors might document their understanding of internal controls?

A
  1. Flowcharts of transaction cycles
  2. Internal control questionnaires
  3. Narrative write-ups (memos)
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64
Q

Who should be informed when fraud has occurred that is material (whether or not senior management is involved in the fraud)?

A

The auditor should inform those charged with governance.

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65
Q

What is the audit risk model that is applicable to classes of transactions or to account balances?

A

Audit Risk = Inherent Risk x Control Risk x Detection Risk

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66
Q

What is meant by the term “initial audit”?

A

The prior year’s financial statements have been audited by a predecessor auditor

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67
Q

What type of assurance is associated with an audit of an entity’s financial statements?

A

Positive assurance, which is a high level of assurance.

68
Q

What is the auditor’s responsibility to enforce the distribution of the auditor’s written communication having an alert to restrict the use of it?

A

The auditor is not responsible for enforcing such distribution. The purpose of the alert is to appropriately communicate the restricted distribution.

69
Q

What is meant by the term “required supplementary information”?

A

Information that a designated accounting standard setter requires to accompany an entity’s basic financial statements (although the information is not part of the basic financial statements, authoritative guidelines for measurement and presentation have been established)

70
Q

What if the First Attestation Standard of Field Work?

A

Planning and Supervision - The practitioner must adequately plan the work and must properly supervise any assistants.

71
Q

What is the first General Attestation Standard?

A

Training - The practitioner must have adequate technical training and proficiency to perform the attestation engagement.

72
Q

What is usually considered to be the best evidence of fair value for a financial instrument that is measured at fair value?

A

Quoted market prices obtained from financial publications, national exchanges, or NASDAQ

73
Q

Define “database system.”

A

A set of interconnected files that eliminates the redundancy associated with maintaining separate files for different subsets of the organization

74
Q

Define “local area network (LAN).”

A

A network of hardware and software interconnected throughout a building or campus

75
Q

Define “real time processing.”

A

The processing of data whereby the data files are immediately updated

76
Q

What is meant by the term “hedge”?

A

A hedge is a defensive strategy designed to protect against the risk of adverse price or interest rate movements to achieve a state of balance.

77
Q

What is the difference between an accounts payable system and a vouchers payable system?

A

An accounts payable system aggregates payables to identify the total owed to any vendor. A Vouchers payable system keeps track of individual transactions for which payment is owed without summarizing the totals by vendor.

78
Q

Identify two reasons for assessing control risk at the maximum level.

A
  1. The auditor believes that the design of internal control is ineffective.
  2. The auditor believes that reliance on internal control (and performing applicable tests of control) is not an efficient audit strategy compared to a wholly substantive audit approach.
79
Q

Define the term “specialist.”

A

An individual or organization possessing expertise in a field other than accounting or auditing, whose work in that field is used by the auditor to assist the auditor in obtaining sufficient appropriate audit eveidence

80
Q

Define “analytical procedures.”

A

Evaluations of financial information through analysis of plausible relationships among both financial and non-financial data.

81
Q

Define “detection risk.”

A

The probability that a material misstatement, that was not prevented or detected by internal control, was not detected by the auditor’s substantive audit procedures

82
Q

List the two types of financial-statement-related frauds.

A
  1. Fraudulent financial reporting (sometimes called cooking the books)
  2. Misappropriation of assets (covering up theft by false journal entries)
83
Q

What is the definition of “fraud” that is relevant to the auditor?

A

An intentional act by one or more individuals among management, those charged with governance, employees, or third parties, involving the use of deception that results in a misstatement in the financial statements.

84
Q

Define what is meant by the term “those charged with governance.”

A

The person(s) or organization(s) with responsibility for overseeing the strategic direction of the entity and the obligations related to the accountability of the entity

85
Q

List two access controls applicable to the expenditures/disbursements transaction cycle.

A
  1. Cash disbursement employees should be bonded.

2. Access to cash disbursements or related documents should be limited to authorized personnel.`

86
Q

Identify three access controls applicable to the Payroll transaction cycle.

A
  1. Access to personnel files should be limited to authorized personnel.
  2. Access to payroll checks should be limited to authorized personnel.
  3. Personnel with access to payroll checks should be bonded.
87
Q

List access controls that can be used in the Cash Receipts business cycle.

A
  1. Employees with access to cash should be bonded.

2. Access to cash receipts should be limited to those authorized.

88
Q

How might the auditor address the rights and obligations assertion for inventory?

A

Inquire of management about any inventory held on consignment or pledged as collateral. The auditor might also read the entity’s debt agreements for any discussion of collateral, such as inventory

89
Q

What two topics of responsibility are addressed in the Management’s Responsibility section of the auditor’s report?

A
  1. Management’s responsibility for the fair presentation of the financial statements
  2. Management’s responsibility for the design, implementation, and maintenance of internal control related to the financial reporting
90
Q

What is the effect on the successor accountant’s compilation or review report when the predecessor accountant’s compilation or review report is not presented on the prior year’s financial statements?

A

The successor accountant’s report should include an explanatory paragraph that identifies the nature and date of the predecessor’s report and states that the current accountant takes no responsibility for the prior year’s financial statements.

91
Q

What steps should be taken when departing from Generally Accepted Accounting Principles (GAAP)?

A
  • Disclose departure.
  • Disclose approximate effects of departure
  • Explain why GAAP compliance would mislead.
92
Q

What level of professional conduct is established by the Code?

A

Minimum levels have been established.

93
Q

To what type of work do the AICPA rules apply?

A

The rules apply to attest work.

94
Q

What is the only type of prospective financial statements for which an examination report can have general unrestricted distribution?

A

Forecast can have unrestricted distribution (any report on a projection must have restricted distribution).

95
Q

Define “assurance services.”

A

Independent professional services that improve the quality or context of information for decision makers

96
Q

Why do auditors emphasize transaction cycles?

A

Control risk is generally constant within a particular category of transaction as all transactions are processed the same way. So, the transaction cycle is the highest level of aggregation for which control risk may be viewed as a constant.

97
Q

List the three categories of incompatible functions associated with segregation of duties.

A
  1. Authorization of transactions (execution)
  2. Accounting (record-keeping)
  3. Access to assets (custody)
98
Q

What is the purpose of a “review” as prescribed in Statements on Standards for Accounting and Review Services?

A

The purpose of a “review” is to obtain limited assurance, sometimes called negative assurance, that there are no material modifications that should be made to the financial statements.

99
Q

When one or more material weaknesses exist, what considerations should the auditor give regarding the internal controls over financial reporting?

A
  • Internal control over financial reporting cannot be considered effective.
  • The auditor should express an adverse opinion on internal control and consider the implications to the audit of the entity’s financial statements.
100
Q

What is the purpose of the AICPA Statement on Standards for Attestation Engagements (SSAE) No. 15, “An examination of an Entity’s Internal Control Over Financial Reporting That is Integrated With an Audit of Its Financial Statements”?

A

The AICPA issued SSAE No. 15 to supersede an earlier SSAE and, thereby, more closely align AICPA standards when an auditor is reporting on internal control over financial reporting for a non-issuer with the standards of the PCAOB applicable to audits of issuers (Auditing Standard No. 5).

101
Q

List the four assertions about presentation and disclosure (footnotes).

A

Occurrence and rights and obligations
Completeness
Classification and Understandability
Accuracy and Valuation

102
Q

What communication is required with those charged with governance when there is “substantial doubt regarding an entity’s ability to continue as a going concern?”

A
  1. Nature of conditions identified.
  2. The possible effect on financial statements and disclosures.
  3. The effect on the auditor’s report.
103
Q

List some examples of false, misleading, or deceptive acts.

A
  • Creating false or unjustified expectation of favorable results
  • Implying the ability to influence a court or agency
  • Estimating a fee knowing that the amount charged will likely be much higher
104
Q

If a modified opinion on the set of financial statements is material and pervasive to the specific element, what is the effect on the separate report on the specific element?

A

The auditor should either:

  1. Express an adverse opinion on the specific element when the modification involves a misstatement.
  2. Disclaim an opinion on the specific element when the modification involves a scope limitation.
105
Q

What is the effect of material non-compliance on the examination report?

A

The accountant should express a qualified or adverse opinion and report directly on the subject matter, not on management’s assertion.

106
Q

Under what circumstances are contingent fees prohibited?

A

Contingent fees are prohibited for performing:

  • Any work for attest client
  • Preparation of tax return or refund
  • Correcting an omission in original return
107
Q

What is meant by the term “lapping” related to accounts receivable?

A

An attempt to cover up a theft of receipts, when a clerk might apply a different customer’s payment to a prior customer’s account (whose payment was stolen) to conceal the theft

108
Q

What is the auditor’s basic responsibility regarding communication with those charge with governance?

A

The auditor must communicate those matters that are “significant” and relevant to the responsibilities of those charged with governance in overseeing the financial reporting process.

109
Q

What is meant by the term “subsequent events”?

A

Events or transactions that occur after the balance sheet date and before the release of the auditor’s report which have a material effect on the financial statements and, therefore, require either financial statement adjustment or disclosure

110
Q

What should the auditor do when subsequently discovered facts become known to the auditor (either before or after the report release date)?

A

Discuss the matter with management ( and possibly those charged with governance) and determine whether the financial statements require revision. If so, inquire how management will deal with the matter.

111
Q

Define “material weakness.”

A

A deficiency (or combination of deficiencies) in internal control such that there is a reasonable possibility that a material misstatement of the entity’s financial statements will not be prevented or detected and corrected on a timely basis

112
Q

What type of professional requirement is indicated by the word “should” in AICPA professional standards?

A

Presumptively mandatory requirement

113
Q

Identify the topics associated with the three general standards formerly known as Generally Accepted Auditing Standards (GAAS), which are still applicable to the Public Company Accounting Oversight Board’s (PCAOB’s) auditing standards.

A
  1. Training
  2. Independence
  3. Due Professional Care
114
Q

Who issues the International Financial Reporting Standards (IFRS)?

A

The International Accounting Standards Board (IASB), which is an independent accounting standard-setting body that is not affiliated with IFAC. IFAC is not an “accounting” standard-setting body.

115
Q

Under the Principles of the Code of Professional Conduct, what type of financial interest impairs independence?

A
  • Direct and material
  • Indirect and material
  • Direct and immaterial
  • But not: indirect and immaterial
116
Q

Do gifts from a client to the auditor impair independence?

A

Not necessarily. While gifts can impair independence, independence is not impaired if the value is “clearly insignificant.”

117
Q

What is the purpose of analytical procedures in the overall review?

A

To verify the conclusions reached in the audit

118
Q

What is meant by the term “user auditor”?

A

An auditor who audits and reports on the financial statements of a user entity

119
Q

Define “internal control”

A

A process –effected by those charged with governance, management, and other personnel – designed to provide reasonable assurance about the achievement of the entity’s objectives with regard to reliability of financial reporting, effectiveness and efficiency of operations, and compliance with applicable laws and regulations

120
Q

What are substantive procedures?

A

Procedures performed to detect material misstatement at the relevant assertion level; these consist of tests of details and substantive analytical procedures.

121
Q

Identify three inherent limitations of internal control?

A
  1. Costs of controls should not exceed the expected benefits.
  2. Mistakes in judgement occur due to carelessness, fatigue, misjudgments, etc.
  3. Segregation of duties may break down due to collusion or management override of internal controls.
122
Q

When should the auditor assess the operating effectiveness of internal control?

A

Whenever the auditor contemplates a reliance strategy (which means the same thing as “assessing control risk at less than the maximum level”) and only after performing the appropriate tests of control

123
Q

What is the purpose of stratification?

A

To reduce the overall variability within the population

124
Q

How might the auditor’s decisions about the extent of audit procedures lower detection risk?

A

Increasing the sample sizes for audit testing will lower detection risk.

125
Q

Define “significant deficiency.”

A

A deficiency (or combination of deficiencies) in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance

126
Q

What is the primary focus of the auditor regarding an entity’s transactions with related parties?

A

Evaluating the adequacy of disclosure about the related party transactions

127
Q

List the disadvantages of narratives (memos) to document the auditor’s understanding of internal controls.

A
  1. Writing such memos is rather unstructured, lacking a systematic approach.
  2. It may be rather easy to overlook relevant internal control issues.
128
Q

What is meant by the term “specific transaction”?

A

A completed or proposed transaction or group of related transactions or a financial reporting issue involving facts and circumstances of a specific entity

129
Q

List two types of substantive audit procedures.

A
  1. Analytical procedures

2. Tests of details

130
Q

List the two types of tests of details.

A
  1. Test of transactions

2. Test of ending balances

131
Q

What is meant by the term “engagement quality control review”?

A

A process designed to provide an objective evaluation, before the report is released, of the significant judgements the engagement team made and the conclusions it reached. (Such a process is only for those audit engagements for which the firm has determined that an engagement quality control review is required, and is not applicable to all audits.)

132
Q

List the two general types of confirmations.

A
  1. Positive

2. Negative

133
Q

Identify the two characteristics of the internal auditor that the auditor should evaluate before relying on the internal auditor’s work.

A
  1. Competence

2. Objectivity

134
Q

What is meant by the “objectivity” of the internal audit function?

A

The organizational level to which internal auditors report (organizational status)

135
Q

Define “tagging transactions.”

A

The process of adding an electronic tagging to specific client transactions and tracing them through the client’s system

136
Q

Define “sampling risk.”

A

The risk that the sample may not be truly representative of the population

137
Q

What is the only component of the audit risk model that the auditor controls?

A

Detection risk

138
Q

What is meant by the “competence” of internal auditors?

A

The internal auditors’ education, certification, professional experience, etc.

139
Q

What is the schedule for interbank transfers used for?

A

It is used to verify that transfers between the entity’s bank accounts are recorded properly (and to detect kiting, which overstates the cash balance).

140
Q

What independence safeguards need to be in place by an audit firm if a former employee accepts a position with a client?

A
  • Former employee cannot be in a position to influence accounting firm’s operation or financial policies or participate in firm’s affairs.
  • Amounts due former employee from firm not variable; ongoing attest team considers appropriateness of modifying engagement procedures; firm assesses whether existing team members can continue to be skeptical; firm reviews subsequent attest engagement if person went to client within one year.
141
Q

Identify the four assertions for account balances at the end of the period.

A

Existence
Completeness
Rights and Obligations
Valuation and Allocation

142
Q

What is meant by the term “factual misstatements”?

A

Misstatements for which there is no doubt

143
Q

When the auditor has substantial doubt about an entity’s ability to continue as a going concern, what further evidence-gathering responsibilities does the auditor have?

A
  • Inquire about management’s strategy to overcome the entity’s financial difficulties; and
  • Evaluate the feasibility of the key elements of management’s plans with emphasis on mitigating factors.
144
Q

Define “parallel simulation.”

A

The processing of the client’s actual data using the auditors software and then comparing the auditor’s output to the client’s output for agreement

145
Q

Define “customized audit software.”

A

Programs specifically written to access the files of a particular client. The cost might be modest, but the benefits are limited to the specific client for whom the software was written.

146
Q

Define “fair value.”

A

The amount at which the asset could be bought or sold in a current transaction between willing parties, that is, other than in a forced or liquidation sale

147
Q

What is contained in the permanent file of the audit documentation?

A

The permanent file contains documentation of matters having ongoing audit significance.

148
Q

Define the term “risk assessment procedures.”

A

Procedures performed to obtain an understanding of the entity and its environment, including its internal control

149
Q

Identify the four primary themes associated with the American Institute of Certified Public Accountants’ (AICPA’s) seven principle for audit standard setting.

A

PR-PR

  1. Purpose/Premise
  2. Responsibilities
  3. Performance
  4. Report
150
Q

To what matters should the independent accountant provide a comfort letter (positive assurance)?

A

The independent accountant should give positive assurance (an opinion) only as to whether the audited financial statements comply with the form and content required by the SEC.

151
Q

What conditions are required to be present when reporting on pro forma information?

A
  1. The document containing the pro forma information includes or references the complete historical financial statements.
  2. The accountant has audited or reviewed the related historical financial statements.
152
Q

What does the acronym SSCS stand for?

A

Statements on Standards for Consulting Services

153
Q

When should the auditor assess the design effectiveness of internal control?

A

In planning every audit under GAAS, as a basis for determining the nature, timing, and extent of further audit procedures

154
Q

What is the purpose of a bank confirmation?

A
  1. It verifies the existence and ownership of bank accounts; and
  2. It also provides evidence about the completeness and terms of notes payable with bank.
155
Q

What two primary independence concerns do the Department of Labor independence rules address?

A
  • Financial ties

- Employment ties

156
Q

List the five assertions related to income-statement items (that is, for transactions and events during the period).

A 
Accuracy
Occurrence
Completeness
Cutoff
Classicication
157
Q

List the actions auditors should avoid in order to preserve independence.

A
  • Performing management functions
  • Making management decisions
  • Appearing to do these things
  • Taking custody of client assets
158
Q

List the activities forbidden by Sarbanes-Oxley for public company audit clients.

A
  • Bookkeeping or other services related to the accounting records of financial statements.
  • Financial information systems design and implementations
  • Appraisal or valuation services, fairness opinions, or contributions-in-kind reports
  • Actuarial services
  • Internal audit outsourcing services
  • Management functions or human resources
  • Broker or dealer, investment adviser, or investment banking services
  • Legal and expert services unrelated to audit
159
Q

What four matters should be documented with respect to materiality considerations?

A
  1. Materiality for the financial statements as a whole
  2. Materiality level(s) for applicable transactions, account balances, or disclosures
  3. Performance materiality
  4. Any revision of those considerations during the audit engagement
160
Q

WHat are some considerations that must be given by the auditor during the planning phase of the audit?

A
  1. Determine whether to accept or continue the audit engagement.
  2. Assess the risk of material misstatement.
  3. Evaluate requirements for staffing and supervision.
  4. Prepare the required written audit program (also called the “audit plan”).
161
Q

List the three broad categories of assertions under the AICPA professional standards.

A
  1. Account balances at the end of the period (there are four assertions related to the balance sheet)
  2. Classes of transaction and events during the period (there are five assertions related to the income statement)
  3. Presentation and disclosure (there are four assertions related to the footnotes applicable to any of the financial statements)
162
Q

Prior auditing standards referred to evaluation stage materiality. What did the term “evaluation stage materiality” mean?

A

The determination of whether the financial statements were fairly stated in all material respects at the completion of field work

163
Q

What is meant by Generally Accepted Auditing Standards (GAAS) under the clarified auditing standards?

A

The Statements on Auditing Standards issued by the AICPA’s Auditing Standard Board (the ASB).

164
Q

When is the detailed testing of payroll (or other expense accounts) typically performed?

A

Usually performed only when the auditor’s analytical procedures suggest that there is a risk of material misstatement relating to payroll (or other expense accounts)

165
Q

Define “immediate family members” (as defined for independence purposes).

A
  • Spouse
  • Spousal equivalent
  • Dependents (whether or not related)

CPA - AUD (10 decks)

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